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Economics > Theme 3 ( Need To Learn ) > Flashcards

Theme 3 ( Need To Learn ) Flashcards

1
Q

Principal-agent problem

A

Owners aim to maximise profits, workers aim to maximise personal benefit - workers acting on behalf of owners without their best interests

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2
Q

Advantages of vertical integration

A

Less risks, control of quality of supply, increased profit potential

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3
Q

Disadvantages of vertical integration

A

Lack of expertise in industry

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4
Q

Advantages of horizontal integration

A

Reduce competition, specialisation, expertise in area

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5
Q

Disadvantages of horizontal integration

A

Increased risk as investment all in one area

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6
Q

Conglomerate

A

Merger with a firm you have nothing in common with

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7
Q

Reasons for demergers

A

Diseconomies of scale, some areas costing outer areas, authorities over regulation

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8
Q

Impacts of demergers

A

Workers - promotion or loss of job, Business - Increase innovation or smaller EoS, Consumers - better products or greater price

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9
Q

Reasons for revenue maximisation

A

Managers/workers salary usually based off revenue, fall in revenue lead to a fall in staff, also greater quantity so EoS and lower price so discourages competition

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10
Q

Reasons for sales maximisation

A

Increased security of business, increase market share + can build customer loyalty, short-term strategy, represents limit pricing

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11
Q

Statisficing definition

A

Principal- agent problem, workers don’t profit-maximise but keep enough profits to keep owners happy

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12
Q

Internal EoS

A

Technical (production - machinery/specialisation), Financial (greater security+ investment more accessible), Risk bearing (able to take greater risks), Managerial (specialised managers), Marketing/Purchasing (bulk supply)

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13
Q

External EoS

A

Improved infrastructure, increased labour in area

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14
Q

Diseconomies of scale

A

Less motivation, geography, harder to control do-ordinate, harder to respond to change

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15
Q

Collusive behaviour

A

Collective agreement to reduce competition, reduces uncertainty of firms - works best in an oligopoly due to high barriers and high trust due to little firms

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16
Q

Overt collusion

A

Firms come to a formal agreement (illegal) - cartel behaviour

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17
Q

Cartel behaviour

A

Rules laid out in a formal document - either agree on price and compete on non-price competition or agree to divide market share

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18
Q

Issues with cartel behaviour

A

Incentive to break cartel as price/output not level firms would choose

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19
Q

Tacit collusion

A

Non-formal agreement (not illegal )

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20
Q

Examples of Tacit Collusion

A

Price leadership (large firms decide price, small firms follow to avoid price wars), Barometric Price leadership (firms gain reputation for being good at leading market )

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21
Q

Game Theory - Maximin policy

A

Firms work out strategy where worst possible outcome is the best - often used in oligopolies

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22
Q

Game Theory - Maximax policy

A

Firms working out policy with the best possible outcome

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23
Q

Issues with Game Theory

A

Always incentive to break game theory

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24
Q

Price wars

A

Occurs in markets where non-price competition is weak, firms make a loss in the short-run but some forced to leave in the long-run - loss of profits

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25
Q

Predatory pricing

A

Used to stop new firms entering the industry - established firms benefit from EoS - firms make loss + is illegal

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26
Q

Limit Pricing

A

Similar to predatory pricing but firms continue to make a profit

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27
Q

Price skimming

A

Once product launched, prices high to cover costs - after time price lowered

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28
Q

Penetration pricing

A

Prices low when enter market to encourage use, prices then raised

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29
Q

Natural monopoly

A

High start up costs, no need to encourage competition (rail)

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30
Q

Monopoly issues

A

May not always to profit maximise due to -x-inefficieny, hurts suppliers as monopoly also monopsony

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31
Q

Monopsony issues

A

Workers can be exploited due to 1 buyer of labour, consumers may suffer from lower quality

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32
Q

Different barriers to entry

A

Legal barriers (patents), predatory pricing/limit pricing, level of start-up costs and sunk costs

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33
Q

Wage determination in perfect competition

A

Wages purely determined off supply and demand

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34
Q

Wage determination in a monopsony

A

1 buyer of labour, can pay a lower wage and employ less

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35
Q

Labour monopoly

A

Trade unions fighting for higher wages and workers rights

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36
Q

Bilateral labour monopoly

A

Both a monopoly and monopsony in labour market, strength of each side determines wage

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37
Q

Issues of the labour market

A

Skill shortages, long-term education, retirement, wage inequality, 0 hour contracts

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38
Q

Positives of a minimum wage

A

Decreases inequality, higher productivity (motivation), prevents unemployment trap

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39
Q

Unemployment Trap

A

Wages so low people would rather stay unemployed and earn from benefits

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40
Q

Issues with a minimum wage

A

Increases unemployment, raises costs, regional differences, larger number on a minimum wage

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41
Q

Maximum wage effects

A

Leads to excess demand - but demand maybe inelastic due to higher skilled jobs effected, may lead to brain drain

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42
Q

Methods to tackle Geographical immobility

A

Increase supply of houses, improve transport links, subsidies on houses in the north, advertising

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43
Q

Methods to tackle occupational immobility

A

Increase training, encourage education, raise government spending

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44
Q

CMA

A

Uk based regulator, work on how to promote competition

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45
Q

Why do regulators investigate mergers?

A

Look at how much it will damage competition ( investigate if market share greater than 25% or combined revenue £700 million +) -CMA able to not approve a merger if it thinks consumers will be exploited

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46
Q

Ways regulators control monopolies

A

Price regulation to encourage efficiency, however difficult to set due to asymmetric information

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47
Q

Other methods regulators use

A

Quality standards set, performance targets set, windfall taxes, breaking up monopolies, reducing barriers to entry

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48
Q

Issues with performance targets

A

Firms likely to resist/fail to meet targets

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49
Q

Deregulation impacts

A

Removal of barriers to entry, increases competition and efficiency but may lead to poor firm behaviour

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50
Q

Competitive tending

A

Goods supplied to the public sector from the private sector- government requests a specification for a good the private firms bid for the contract

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51
Q

Advantages of privatisation

A

Greater competition so improved allocative efficiency and reduced x-inefficiency, reduces government interference

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52
Q

Disadvantages of privatisation

A

Abuse of monopoly power, problems over inequality, some firms should be nationalised (water) as other firms depend on their success, loss of economies of scale, no guarantee firms will enter immediately

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53
Q

Advantages of nationalisation

A

Guarantees a minimum level of service, maximise social welfare (natural monopoly) so allocatively efficient, long-term investment guaranteed, economies of scale,

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54
Q

Disadvantages of nationalisation

A

Principal-agent problem/moral hazard (managers know losses covered by government ), lack of efficiency causing prices to rise, diseconomies of scale, less profits, expensive (worsens deficit), political priorities override commercial issues

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55
Q

Regulatory Capture

A

Regulators are influenced by firms - leads to biased regulation

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56
Q

How could you reduce the principal-agent problem?

A

Managers given shares in the business, encourages them to make profits

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57
Q

What does PED tell us about the impact of taxes/subsidies?

A

Taxes- if PED is inelastic consumer pays more , producers profits increase (and vice-versa) Subsidies - if PED is inelastic consumer benefit more, producers profit decreases

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58
Q

What do the CMA mainly regulate?

A

Large scale Mergers, and if they will be beneficial to the industry - if the combined merger has over 25% market share or if their annual turnover is at least £70 million

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59
Q

Reasons firms grow

A

Economies of scale, more revenue, greater profits

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60
Q

Reasons firms don’t grow

A

Size of the market, access to finance, opener objectives, regulation

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61
Q

Advantages of organic growth

A

Firms keep control, less risk, cheaper

62
Q

Disadvantages of organic growth

A

Slow, lack of innovation, unable to gain access to new markets

63
Q

Advantages of a conglomerate

A

Room for growth in another market, reduces risk, easy for each part of the firm to grow

64
Q

Disadvantages of a Conglomerate

A

No expertise in the industry which may be damaging to profits

65
Q

Constraints on business growth

A

Size of the market (worse in a niche market), access to finance (banks less willing to lend to smaller firms + less retained profit), owner objectives (don’t want extra risk), regulation (CMA)

66
Q

Why do business profit maximise?

A

Interests of owners/shareholders, provides funds for investment and helps them survive a slowdown during recession

67
Q

Marginal revenue calculation

A

Change in total revenue divided by change in output

68
Q

Impact of negative marginal revenue

A

Total revenue decreases as output increases, demand become inelastic

69
Q

Total cost calculation

A

Fixed + Variable cost

70
Q

AVC calculation

A

Total variable cost divided by output

71
Q

AFC

A

Total fixed cost divide by output

72
Q

Short-run cost

A

At least 1 factor of production is fixed

73
Q

Long-run cost

A

All of the factors become variable

74
Q

Diminishing Marginal Productivity

A

Extra output is decreasing by employing more labour (diseconomies of scale)

75
Q

Shift in Average Cost

A

Taxes/technology/Eos or DEoS - changes in costs of production

76
Q

Perfect competition efficiency

A

Allocatively and productively efficient, not dynamically efficient as small firms so lack of SNP (especially in the long-run)

77
Q

Monopolistic competition efficiency

A

Firms not allocatively or productively efficient as aim to profit maximise and have some degree of price setting but firms may be dynamically efficient - however firms still small

78
Q

What does Game Theory show in an oligopoly?

A

Shows why firms may break a collusion if there is an incentive to do so - dependent on risk

79
Q

Oligopoly efficiency

A

Statically inefficient, however large SNP may mean firms are dynamically efficient

80
Q

Benefits of price discrimination

A

Firms can increase profits for R and D, should reduce equality, allows survival of a product/service

81
Q

Costs of price discrimination

A

Consumers with inelastic demand may be on lower income so worsens inequality

82
Q

Benefits of a monopoly for the firm

A

Huge profits, firms finance for investments and build up a reserves for difficulties, benefit from EoS, international market

83
Q

Problems of a monopoly for firms

A

Firms may not always profit maximise as are x-inefficient - profits may be increased if there is some level of competition

84
Q

Benefits of a monopoly on workers

A

Due to the inefficiency of a monopoly employees receive higher wages

85
Q

Issues of a monopoly on workers

A

Employ fewer workers, monopoly may also be monopoly in the labour market

86
Q

Issues with a monopoly for suppliers

A

Monopoly may also had monopsony buying powers, supplies sold for cheap losing suppliers profits

87
Q

Efficiency of a monopoly

A

A monopoly is statically inefficient, may be dynamically efficient however no incentive to invest to improve efficiency

88
Q

Argument that monopolies will be efficient

A

Want to protect market share + if grown organically should be efficient

89
Q

Characteristics of a contestable market

A

Perfect knowledge, freedom of entry/exit, low product loyalty, low sunk costs, available technology

90
Q

Example of a contestable market

A

Hotel market, due to AirBnB

91
Q

Implications of a contestable market

A

Firms use limit pricing, in a perfectly contestable market firms only make normal profits, firms will be productive and allocatively efficient

92
Q

Barriers to entry in a contestable market

A

Economies of scale

93
Q

Barriers to exit in a contestable market

A

Cost to write off assets, pay leases and make workers redundant

94
Q

Sunk costs definition

A

Fixed costs a business can’t recover if leaves industry, all suffer sunk costs

95
Q

Degree of contestability definition

A

Extent to which the gains from market entry for a firm exceed the costs of entering the market

96
Q

Derived demand

A

Demand for labour comes from demand for the product

97
Q

Factors influencing demand for labour

A

Wage rates, demand for product, prices of alternative wages in otherness countries, technology, regulation

98
Q

Factors effecting the PED of labour

A

Directly correlated to the PED for product, proportion of wages to the total cost of production, substitutes, time (long-run more elastic as machinery is developed)

99
Q

Factors influencing the supply of labour

A

Wages (backwards bending supply curve), population and distribution of age, non-monetary benefit (free childcare), education/training, trade unions, wages and conditions of other jobs, retirement age

100
Q

Problems of immobility

A

Causes regional excess supply/excess demand of labour

101
Q

Elasticity of labour supply

A

Responsiveness of supply to a change in wage rates - depended on the level of qualifications/training and availability of suitable labour in other industries, time of job, also vocational (I,e teachers)

102
Q

When was the minimum wage introduced?

A

1999

103
Q

What can the maximum wage cause

A

Excess demand for labour, also a brain drain

104
Q

What is the argument a maximum wage has little impact?

A

Effects small amount of workers so has little effect on market, also not applicable so business owners

105
Q

Short run public sector wage setting

A

Government makes whatever wage decisions it decides

106
Q

Long-run public sector wage setting

A

Government forced to increase wages if private sector wages are higher

107
Q

What did the government do between 2010-2015, and what impact did this have?

A

Public wage pay freeze, put downward pressure on private wages as firms could justify not raising wages

108
Q

Issues with the CMA

A

Investigate very few mergers, can suffer from regulatory capture

109
Q

How do the government use price regulation to control monopolies?

A

Use RPI-X formula, X represents expected efficiency gains for firms, RPI stands for retail price inflation - can also use RPI-X+K where K represents investment

110
Q

What does price regulation do for firms?

A

Gives an incentive for firms to be efficient as if they can lower costs by more than X they can increase profits

111
Q

What does price regulation on monopolies do for consumers?

A

Prevents excessive prices for consumers

112
Q

Issues with using price regulation to control monopolies

A

Asymmetric information means it’s difficult to know where to set X (I.e Water companies forced to cut prices by 10% in 2000)

113
Q

How can profit regulation be used to control monopolies?

A

USA rate of return regulation - encourages investment to increase profits

114
Q

What are the issues with using profit regulation to control monopolies?

A

May leads to firms over employing to increase profits which causes inflation, also firms aim to profit maximise so may not be more efficient

115
Q

What other regulations can be used to control monopolies?

A

Setting of quality standards and performance targets (I.e trains on time in Britain)

116
Q

Issues with using performance targets to control monopolies

A

Firms will resist targets, change targets without improving(I,e trains change timetable so not late), if fines aren’t enough firms will just fail to meet targets

117
Q

How can the government promote small businesses?

A

Training and grants to new entrepreneurs c use tax incentives/subsidies - increases innovation and efficiency

118
Q

How can the government use deregulation to promote small businesses?

A

Removal of legal barriers to entry which improves efficiency (Deregulation Act 2015) but may lead to poor business behaviour

119
Q

Issues with competitive tendering

A

Could reduce quality as private sector profit maximise, bidding can be time consuming

120
Q

Enterprise Act 2002

A

Firms engaging in collusive behaviour or predatory pricing could be fined up to 10% of worldwide annual sales or cartels could face prison time ( Tesco fined £10 million in 2011 for fixing the prices of milk/eggs)

121
Q

How can monopsony power be restrained?

A

Regulation, minimum prices for suppliers, trade unions

122
Q

How can worker’s rights be improved

A

Through government (health and safety controls + contracts) and trade unions (increase wages)

123
Q

Issues with trade unions

A

Increase unemployment

124
Q

Impacts of government intervention in a market

A

Prevent exploitation of consumers, increase efficiency (dynamic) through investment

125
Q

Issues with government intervention

A

Over regulation leads to costs rising which increases inefficiency

126
Q

Issues with government run businesses

A

May suffer from x-inefficiency as not profit driven, offer less choice

127
Q

Example of a regulatory capture

A

Capture of HRMC by Vodafone, managed to reduce tax on firm from £7billion to £1 billion in 2009-10

128
Q

Problems with regulating due to asymmetric information

A

Industries provide the government less information so can’t regulate as well

129
Q

Reasons why firms don’t profit maximise

A

Lack of knowledge of where MC=MR, principal-agent problem, avoid over regulation, upset stakeholders

130
Q

Impact of profit maximising on consumers + effect of this in company?

A

Can lead to excessive prices - builds a bad reputation for the company

131
Q

Impact of profit maximising on workers + effect of this on the firm?

A

Charged lower wages, can lead to strikes

132
Q

Impact of profit maximising on workers + effect of this on the firm?

A

Can lead to lower wages - causes strikes

133
Q

Impact of profit maximising on environment + effects of this on firm?

A

Cutting costs may cause damages to the environment I.e dumping waste - leads to bad reputation

134
Q

Natural rate of unemployment definition

A

Unemployment that remains when the labour market is in equilibrium

135
Q

Reasons for the natural rate of unemployment

A

Lack of skills, geographical immobility, waiting for better jobs, seasonal unemployed waiting for season labour to return

136
Q

What does CMA stand for?

A

Competition and markets authority

137
Q

Market failure linked to efficiency

A

When firms aren’t being allocative efficient there is some level of market failure

138
Q

Characteristics of a natural monopoly

A

Huge fixed and start up costs, huge potential for economies of scale

139
Q

Reasons it’s beneficial for only 1 firm in the industry in a natural monopoly

A

An additional firm wouldn’t benefit from Economies of Scale so wouldn’t be able to remain in the industry in the long run, causes a waste of resources - also competition ruins EoS exploitation of the existing firms

140
Q

Why do natural monopolies need regulation?

A

Would charge very high prices with low quantity if not regulated - show on diagram

141
Q

Reasons there is a lack of private sector natural monopolist

A

Natural Monopolies often only make normal profits as are forced to produce where AR=MC and then subsidised losses - lack of incentive for private firms to enter a little profit opportunities

142
Q

Evaluation of privatisation

A

Depends on competitiveness of new private market, depends on regulation (lack of regulation creates monopolies)

143
Q

Evaluation of nationalisation

A

Funding vs delivery of national company, competitiveness of market before nationalised, regulation more viable option

144
Q

Reasons market isn’t allocatively efficient

A

Imperfect information, barriers to entry, irrational consumer behaviour

145
Q

Trickle down effects

A

Higher wage earners spend money creating a multiplier effect and growing the economy, which creates wage improvements and labour opportunities for lower wage earners - also tax revenue can be redistributed to the poor

146
Q

Arguments that wage differentials are good

A

Incentive to gain skills/qualifications, trickle down effect, encourages enterprise, reduces risk of unemployment trap as incentive for people to work as can earn high wages, promotes efficient resource allocation

147
Q

Argument that wage differentials create issues

A

Creation of income inequality - reduces growth in the long run as those on higher incomes have lower MPC (also links to trickle-down effect not working), gov solutions are limited if they are the employer

148
Q

Evaluations of wage differentials

A

Costs/benefits of income inequality, risks of government failure, Sr or Lr - better benefits in the long-run

149
Q

Issues with state provision of goods

A

Creates excess demand as is free, high costs, government have imperfect information, inefficiency of the state

150
Q

Remember with consumers/producers!

A

Consumers always above producers UNLESS it’s a subsidy

Economics (7 decks)

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